TIME TO ZUNE IN / Microsoft releasing challenge to iPod -- portable player and online store

Published 4:00 am, Monday, November 13, 2006

Photo: DOUGLAS EVANS

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In this photo provided by Microsoft on Thursday, Sept. 14, 2006, the new "Zune" portable media player is shown in black, white, and brown. The device represents Microsoft Corp.'s effort to compete against Apple's iPod will include wireless technology to let people share their favorite songs, playlists or pictures with other Zune users. Microsoft is headquartered in Redmond, Wash. (AP Photo/Courtesy Microsoft, Douglas Evans) less

In this photo provided by Microsoft on Thursday, Sept. 14, 2006, the new "Zune" portable media player is shown in black, white, and brown. The device represents Microsoft Corp.'s effort to compete against ... more

Photo: DOUGLAS EVANS

TIME TO ZUNE IN / Microsoft releasing challenge to iPod -- portable player and online store

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Microsoft Corp. is breaking into the music business in a big way Tuesday as it begins selling its first portable digital music player, the Zune.

It marks the technology giant's first direct challenge to rival Apple Computer Inc.'s overwhelmingly popular iPod, which since its premiere five years ago has dominated the $4.3 billion mobile music player market.

"Microsoft is a tenacious competitor," said Ross Rubin, an analyst with the market research firm NPD Group. "Apple has faced a number of challenges, but this may be the strongest" one yet.

The Zune premieres as the mobile music industry becomes increasingly crowded, with cell phones, GPS machines and other portable media devices also jockeying to offer music services and storage. But Microsoft, which already is heavily invested in gaming and television, said the time was right to take a step toward establishing itself as a contender in the portable music sector.

"There's a big business opportunity and we're still early in this generation of digital music," said Robbie Bach, president of Microsoft's entertainment and devices division. "We think there are still a lot more people who are going to be looking at this marketplace."

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The Zune, which Microsoft started developing a year and a half ago, is a 30-GB player that is priced at $249.99 and comes in black, white and brown. The Zune Marketplace, Microsoft's new online music store, offers about 2 million songs, while Apple's iTunes online store has about 3.5 million songs. Both companies have deals with all the major recording companies.

Zune Marketplace

Like Apple's iPod, the Zune will play any kind of digital music file. But songs bought on the Zune Marketplace will work only on the Zune, just as songs bought from the iTunes store will play only on Apple's player.

Consumers can download songs or subscribe to a $14.99 monthly all-you-can-download service from the online store. Once purchased, users can keep the songs indefinitely, although standard copyright law applies when copying or sharing the files. The Zune Marketplace also operates with Microsoft points, a system that can also be applied to Microsoft's Xbox games. A song costs 79 points or 99 cents.

But what Microsoft is betting on is the ability to share music and photos between Zunes. The players use an ad-hoc network -- using 802.11 technology, but with no wireless Internet access necessary -- to transfer files from as far as 30 feet away. The recipient can play the song three times before having to buy it.

"People don't think of music as a solitary experience," Bach said. "People want a social experience, whether it's video games, watching a movie or listening to music. This is part of building that social community."

Bach said that Microsoft plans to extend the social aspect to the Zune Marketplace, so that users can chat about music online, much as gamers do with the Xbox. Apple also allows users to comment and share ideas, but Microsoft's idea appears to embrace Web 2.0 social networking ideals, although details are sketchy.

"I've seen the demonstrations on the Internet about how you can find another person using a Zune and give them a song they can play three times," Jobs said. "It takes forever. By the time you've gone through all that, the girl's got up and left! You're much better off to take one of your earbuds out and put it in her ear. Then you're connected with about 2 feet of headphone cable."

Microsoft said it takes only 10 to 15 seconds to transfer songs.

Mike McGuire, vice president of research at Gartner, said the wireless feature will become more powerful once consumers can buy songs immediately after receiving them wirelessly. Presently, users will have to flag the song they received, then buy it when they reconnect the player to their computer. "That gives someone time to think about the purchase" and the opportunity to change their mind, he said.

To enable that kind of immediate interaction, though, the Zune might have to connect to the Internet, a feature that isn't now available. Microsoft has hinted that the 802.11 wireless technology it is using could help it move in that direction.

Through the first nine months of 2006, the iPod held 75 percent of the digital music player market, according to the NPD Group. Milpitas' SanDisk Corp. trailed at a distant second with 10 percent and Creative Technology Ltd. ranked third with 4 percent.

But a recent ABI Research survey suggested that the Zune may have a chance to grab some market share: It found that 58 percent of those identifying themselves as iPod owners said they would consider buying a Zune.

Apple loyalty an issue

Apple's Mac computer customers have been loyal to Apple, but its iPod customers may not be as devoted, said Steve Wilson, principal analyst with ABI Research. The iPod took an early lead because it was easy to use, Wilson said, but now other MP3 players have become simpler, too.

"You love your iPod initially because it's really cool and works really well, but as time goes on other devices come onto the market that work pretty well, too," Wilson said. "They cost less and they have more function, so now the only advantage (for the iPod) is the cool factor."

But Wilson said he expects the Cupertino technology company to introduce a new iPod that will keep it ahead in the game. Microsoft will probably sell a number of Zunes during the holidays, but "it's another thing to start taking away significant market share from Apple."

Until now, Microsoft had only dabbled in the digital music industry, offering its PlaysforSure technology that let consumers organize their music with Windows Media Player and play it on a number of PlaysforSure devices, such as SanDisk's Sansa and the Creative Zen. It also started a joint online music service with MTV, called Urge, earlier this year.

The introduction of the Zune means that Microsoft will be competing with its partners, and it could force some to drop out.

"They're stabbing everyone in the back," said Dan Sheeran, RealNetwork's senior vice president of music. "We think you'll see a rapid market consolidation. Everyone will either go away or partner" with Apple, Microsoft or RealNetworks, which offers a competitive online music system.

Microsoft said that it intends to continue to offer its PlaysforSure technology, but that to develop something that could compete against the iPod it had to develop a closed system.

In another move that could inject an interesting twist, Microsoft said that it will share a cut of its revenue from sales of its Zune music players with Universal Music Group and that it plans to strike similar deals with other record labels. Apple does not share revenue from iPod sales with its record industry partners. In addition, record labels have complained that the iTunes 99-cents-per-song structure is too restrictive.

"The music ecosystem hasn't grown very much in the last four or five years," Bach said. "This is our opportunity to change that model and get more money in the hands of artists."

When Microsoft first developed the Xbox gaming console, it lost millions of dollars. But the Xbox, now in its second generation, has since become the chief rival of the Sony PlayStation. And though the gaming and music industries aren't the same, it shows how far Microsoft is willing to go to compete.

"The entire entertainment industry is in a transition," Bach said.

"There will be some established players that will continue, and some who had played bigger roles in the past will play a smaller role in the future."

The Zune

Available: Tuesday

Price: $249.99

Size: 30 GB (7,500 songs, 25,000 pictures or 100 hours of video)

Colors: Brown, black and white

Details: Compatible only with Zune Marketplace, Microsoft's new online music store. Songs are 99 cents (79 Microsoft points) per download, or $14.99 for a monthly subscription.

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